Nerd CEO - When Free is the Right Strategy

Sometimes businesses are built by giving things away.    I’ve blogged previously about the importance of asking for money and of creating perceived value through a high price.  This post is about when it is a mistake to ask for money.   Not realizing the power of free led to my biggest ever business mistake.

Three good reasons for giving things away are 1) to build a large network; 2) to establish a standard; 3) to establish a prospect base (which I’m not blogging about today).  Once you have a large network or control a standard, you can use it to actually make money. You can also kid yourself into thinking you’re building value when you give things away and people take them; the potential for deluding yourself and others when you succeed in “selling” free goods is one of the reasons why free is a very high risk strategy.

Skype’s founding strategy was to give away the software and services necessary to make free computer-to-computer voice calls.  They succeeded in building a network of tens of millions of Skype-equipped users and of creating a huge prospect base for paid service like voice mail and the ability to exchange calls with the traditional phone network. There are rumors of spurned ten digit takeover offers.  Whether anyone ever mines an operating profit from what Skype built by giving stuff away won’t be known for years; but, from the founders’ point of view, monetizable value has been created.

At the beginning of the first Internet bubble, Yossi Vardi famously sold his ICQ service to AOL for upwards of $300 million.  ICQ software and connections for instant messaging were free to their users.  ICQ had never been sullied by a penny of revenue.

In the mid 1980s I developed  “print to disk” software called Glue for the Macintosh so that graphic documents made with the rapidly proliferating Mac applications could be emailed and shared even with those who didn’t own the applications used to create them.  The software consisted of a printer driver used to capture documents and a Viewer (whose icon was a View Master).  The Viewer, available both as an application and as a desk accessory, was used to look a documents created by the printer driver.  Sound familiar enough but remember: this was pre Adobe Acrobat.

With some success, we bundled this technology with products that our company, Solutions, developed.  We realized that the nascent online services of the time could benefit from this technology which allowed graphic Mac documents to be posted and emailed.  Readers of the documents would need only the Viewer and not either the specialized document creation applications or our document-capture printer driver.  We succeeded in making a deal with Quantum Computer Services, the predecessor to AOL, which was then concentrating on a growing audience of online Mac users.

Quantum agreed to resell the Viewer for $14.95 and a bundle of the printer driver and the Viewer for $59.95.  Steve Case suggested to me that we give the Viewer away to anyone who wanted to download it in order to create a bigger market for the printer driver.  I countered that Quantum ought to buy the right to distribute the Viewer from us and create value for their service.  “Always ask for the money,” my inner voice said.  My inner voice was wrong;  Steve Case was right.

Some time later Adobe Acrobat was introduced.  Glue was not patented (that’s another mistake and another story).  Glue used QuickDraw, the native graphic language of the Mac, for imaging while Acrobat uses PostScript, which Adobe had successfully popularized as a printer language; and so Acrobat could be and was successfully extended to Windows.  Glue would have had to be rewritten for Windows graphics.  Not doing that was another mistake.

But my big mistake was not making the Viewer free; Adobe did and does make the Acrobat viewer available free and that made all the difference.  I had distribution available in Quantum and Delphi and the other online services.  They were glad to provide hosting and, since they got paid by the minute in those days, anything like a download was all goodness to them.  Not only would Glue itself be downloaded but so would all the documents it could view.  We would have sold lots of printer drivers.  More importantly, we would have controlled a de facto standard.

Next post has some ideas on how to tell whether FREE is a good strategy or just a way of postponing the discovery of whether or not you actually have a way to make money.

I blogged about ICQ and creating network value here.

More about the invention of Glue is here.

More about Skype strategy here.